Reader "aarc" made an effective point on my article of yesterday: there was some support at S&P 1234, the 38% Fibo retracement from the July 2010, not far away from the 38% retracement from the 2007-2009 move, at 1224. Forget other excuses, like the drop in oil prices or the bounce in the euro. Technicals are in charge here, and "aarc's" observation is likely to be the main reason for the bounce back. We close at 1260. I still do not expect a V recovery, even though I note the positive advance/decline of 1705 to 1316, a welcome relief after the blood bath of the past few days. My best guess: resistance at 1270 on short covering and a retest the 1224-1234 range.
Now, granted, this is my best guess. Yes, the current support looks weak. But how many times have I seen the obvious proven false? Practically, if you sell, use tight stops; if you buy, concentrate on what you like for the long term, possibly stocks with a high short interest ratio - in that group, I own WesBanco (WSBC), Maxwell (MXWL), both of which had good earnings in the small cap arena, and Echelon (ELON), whose earnings are always a crap shoot.
Why could we go lower? After all, as I mentioned yesterday, stocks are cheap. This is confirmed by readers' comments. On current earnings and estimates, the Earnings Yield of 7% is a huge premium to the 10-Year TB.
However, despite some companies' guidance, I have not seen estimates coming down, especially for those exposed to Europe. This is a no-brainer. I do not care about the euro or the swissie, I care about European economies. If you can look at me in the eye and say they are fine, you should stop smoking the stuff.
Summer is usually a slow period for the hard working vacationing Europeans, but this summer is going to be one of a kind. Even the hard working will have to take a vacation. No wonder MasterCard (MA) is looking to the Emerging Markets - I am short American Express (AXP).
So, if I am right, the downside comes from lower estimates. I give it a 70% chance.
That being said, I just heard on Kudlow/CNBC that Corzine was waiting in the wings to replace Geithner. This would be a monstrosity. This is the guy behind LTCM. Check my book page 41 and 57. He was thanked from Goldman at the time, pocketing some $400 million. And a number of other things, including New Jersey's problems, which he thought he could fix while spending $100 million on his campaign for governor. Hey, if the guy can write $100 million of his own money on a failed ego trip, imagine what he can do with yours!
If this catches the buzz, do me a favor, do your research and if you agree with me, express your opinion VERY LOUDLY. This would be the Great Fox in the Hen House. Or, as in Jean de La Fontaine, Raminagrobis. Whatever you think of the Europeans of today, La Fontaine nailed these things down for posterity. Raminagrobis is a bad guy.